CHAP009 - Chapter 9 Derivatives: Futures, Options, and...

Chapter 9 Derivatives: Futures, Options, and Swaps Multiple Choice Questions 1. Derivatives are financial instruments that: A) Present high levels of risk and should only be used by the wealthy. B) When used correctly can actually lower risk. C) Should only be used by people seeking high returns from high risk. D) a and c Answer: B LOD: 1 Page: 202 A-Head: The Basics: Defining Derivatives. 2. The value of a derivative is determined by: A) The Federal Reserve B) SEC regulation. C) The value of the underlying asset. D) The risk-free rate. Answer: C LOD: 1 Page: 202 A-Head: The Basics: Defining Derivatives. 3. In a derivative transaction: A) The dollar amount of the transaction increases as the contract date approaches. B) The risk is less than if actually purchasing the underlying asset. C) What one-party gains the counterparty loses. D) All of the above. Answer: C LOD: 2 Page: 203 A-Head: The Basics: Defining Derivatives. 4. The purpose of derivatives is to: A) Increase the risk so the return is larger. B) Eliminate risk for both parties in the transaction. C) Postpone the risk for both parties in the transaction. D) Transfer the risk from one person to another. Answer: D LOD: 1 Page: 203 A-Head: The Basics: Defining Derivatives. 232 Cecchetti: Money, Banking, and Financial Markets

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Chapter 9 Derivatives: Futures, Options, and Swaps 5. Forward contracts are: A) An agreement between two parties. B) Contracts usually involving the exchange of a commodity or financial instrument. C) Highly customized. D) All of the above. E) a and b Answer: E LOD: 2 Page: 203 A-Head: Forwards and Futures. 6. The short position in a futures contract is the party that will: A) Deliver a commodity or financial instrument to the buyer at a future date. B) Suffer the loss. C) Accept the risk. D) Benefit from increases in price of the underlying asset. Answer: A LOD: 1 Page: 204 A-Head: Forwards and Futures. 7. The long position is a futures contract is the party that will: A) Benefit from decreases in the price of the underlying asset. B) Agree to accept delivery of a commodity or financial instrument at a future date. C) Benefit from increases in the price of the underlying asset. D) None of the above E) b and c Answer: E LOD: 2 Page: 204 A-Head: Forwards and Futures. 8. With a futures contract: A) Payment is made when the contract is created. B) No payment is made until the settlement date. C) The short position agrees to purchase the underlying asset. D) The risk is eliminated for both parties. E) b and c Answer: B LOD: 2 Page: 204 A-Head: Forwards and Futures. 233 Cecchetti: Money, Banking, and Financial Markets

Chapter 9 Derivatives: Futures, Options, and Swaps 9. The key difference between a forward and a futures contract is: A) A forward contract is highly customized where a futures contract is not. B) A forward contract is bought and sold on organized exchanges.

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